In Nomura Asset Capital Corp., the plaintiff sued the law firm that advised it “in connection with the securitization of a pool of commercial mortgage loans” for legal malpractice. The trial court denied the defendant’s motion for summary judgment. The First Department modified “to dismiss that part of plaintiffs’ claim alleging that the law firm failed to provide appropriate legal advice, and to limit plaintiff’s claim that the law firm did not perform the requisite due diligence before rendering its legal opinion on the securitization.” This post focuses on the due diligence part of the decision.

The plaintiff alleged that the defendant “committed malpractice by failing to conduct the necessary due diligence before rendering its opinion that the D5 Trust was REMIC-qualified. In particular,” the plaintiff “contend[ed] that” the defendant “should have reviewed the underlying appraisals for all of the properties included in the D5 Securitization, and independently confirmed that they were based on real property values that satisfied REMIC requirements.” The parties appear to have agreed that the defendant was not engaged to review the appraisals. However, the parties’ experts agreed, and the court held, that “if ‘red flags’ are raised about a client’s representations, further inquiry would be warranted.” (Emphasis added).

The Nomura Asset Capital Corp. majority found that it could not “conclude as a matter of law that no such ‘red flags’ were raised” based on a document faxed to the defendant several weeks before it issued its opinion letter that, according to the majority, could be viewed as “contain[ing] warning signs that the Doctors Hospital Loan may not have qualified for REMIC treatment. Although one section of the document shows an appraised value of $68,000,000, which, at first glance, suggests that the loan would be REMIC-eligible, the totality of the other information contained therein raises questions as to whether the $68,000,000 figure constituted only REMIC real property.”

The Nomura Asset Capital Corp. dissent took a different view of the facts, noting as a preliminary matter that

the majority finds that the matter must be sent to trial based solely on one document setting forth the “Deal Highlights” of one of the 156 securitized loans — a document that Nomura did not include among the more than 1,200 exhibits it submitted with its original opposition to the summary judgment motion, that Nomura did not show to either of the two experts it retained to opine on the applicable standard of care (whose respective reports therefore do not refer to it), that Nomura barely touched upon in its appellate brief, and that neither side mentioned at its own instance at oral argument before us.

The dissent went on to state that

I cannot fault the parties for having failed to anticipate the epochal significance with which the majority invests the Deal Highlights document. As more fully discussed below, that document has nothing in it to indicate that the loan with which it deals was more likely to be inappropriate, under the applicable body of law, for inclusion in the securitization than any of the other 155 loans with which it was being securitized. While there is indeed a document in the record that arguably should have alerted an attentive professional to the possible existence of a problem with the loan, that document — an appraisal of the property securing the loan — was not provided to [he defendant] before the securitization closed because [the plaintiff] had not retained [the defendant] to review appraisals of the properties that secured the loans. In my view, therefore, [the defendant] is entitled to summary judgment dismissing [the plaintiff’s] legal malpractice claim in its entirety.

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The majority’s decision sets a high bar for a legal malpractice defendant if the arguable presence of one red flag in a complex commercial transaction is enough defeat a motion for summary judgment. And as the dissent notes, it does it with respect to a red flag that the parties themselves did not appear to consider significant.